Big Lots' (BIG) CEO David Campisi on Q1 2014 Results - Earnings Call Transcript

May.30.14 | About: Big Lots, (BIG)

Big Lots Inc. (NYSE:BIG)

Q1 2014 Results Earnings Conference Call

May 30, 2014 8:00 AM ET

Executives

Andy Regrut, Director of Investor Relations

David Campisi - President and CEO

Tim Johnson - Executive Vice President and CFO

Analysts

Matthew Boss - J.P. Morgan

Brad Thomas - KeyBanc Capital Markets

Paul Trussell - Deutsche Bank

Meredith Adler - Barclays

David Mann - Johnson Rice

Peter Keith - Piper Jaffray

Jeff Stein - Northcoast Research

Anthony Chukumba - BB&T Capital Markets

Dan Wewer - Raymond James

Operator

Ladies and gentlemen, welcome to the Big Lots First Quarter 2014 Teleconference. This call is being recorded. During this session all lines will be muted until the question-and-answer portion of the call. (Operator Instructions)

At this time, I would like to turn -- I would like to introduce today’s first speaker, Andy Regrut, Director of Investor Relations. Please go ahead, sir.

Andy Regrut

Thanks, Anna, and thank you everyone, for joining us for our first quarter conference call. With me here today in Columbus are David Campisi, our CEO and President; and Tim Johnson, Executive Vice President, Chief Financial Officer.

Before we get started, I would like to remind you that any forward-looking statements we make on today’s call involve risks and uncertainties, and are subject to our Safe Harbor Provisions as stated in our press release and our SEC filings, and that actual results can differ materially from those described in our forward-looking statements.

All commentary today is focused on adjusted non-GAAP results from continuing operations. Reconciliations of GAAP to non-GAAP adjusted earnings are available in today’s press release. Also as a reminder, our Canadian operations and our wholesale operations are now treated as discontinued operations.

This morning, David, will start the call with the few opening comments, TJ, will review the financial highlights for the quarter and the outlook for 2014 and then, David, will complete our prepared remarks before taking your questions.

So, with that, I’ll turn the call over to David.

David Campisi

Thanks, Andy, and good morning, everyone. It has been one year almost to the day since my first earnings call as CEO of Big Lots. I am very proud of the progress and accomplishments that have been achieved over the past 12 months and while I believe we will get better in the future. It is important for us to celebrate wins along the way after. After eight consecutive quarters of negative comps dating back to Q4 of 2011, we comp positive this quarter, up nearly 1%.

From a merchandising perspective four of our seven merchandise categories were positive in the quarter. Food was the strongest up double digits. We experienced consistent strength in all major departments. The team has done a very good job improving the consistency and breadth of our offerings, while exciting Jennifer with compelling value throughout the category.

This consistency has given us the confidence to advertise this traffic driving category on a more frequent basis, which is helping to improve transactions and conversion in our stores. Additionally, we are also pleased with the progress of rolling out coolers and freezers which should further supplement growth as we move through the balance of 2014.

The initiative continues to help drive comps and we are on pace to complete this year’s rollout to approximately 600 stores leaving us somewhere in the neighborhood of 725 stores with freezers and coolers by the all important holiday and fourth quarter selling season.

Next is soft home, soft home was up high single digits with strength in bedding, textile, flooring and window related products. The buying disciplines focused on quality, brand, fashion and value have been instilled in our merchant organization and this category maybe more so than any other should benefit. We are still very early in the process and I’m confident that the content will continue to get better and better with the back-to-school sets and on into holiday season.

Next is consumables was up mid-single digits led by pet, HBC and housekeeping. Similar to the success in our food category, the team is doing a great job embracing edit-to-amplify significantly improving our consumables assortment in recent months and delivering more consistency of branded product at values that Jennifer is responding to in a very meaningful way.

Last but certainly not least, furniture also posted positive comps for the quarter, up low single digits. The first quarter is like the Super Bowl for the furniture category as customers tend to want to spend their income tax refund checks on big-ticket product, so positive comps in our biggest quarter is a win for the business.

The majority of the comp increase was driven by our based business and solid execution of product by the team in furniture. We began to expand our furniture financing program in the latter part of Q1 and now expect that our rollout will be complete by the end of Q2, which is ahead of our original timeline. The program is live in about 800 stores and as of this week we are on track to approximately 1,300 stores by the end of Q2.

The results continue to be impressive and we are seeing incremental furniture sales in the high single to low double-digit range. Although, internally we call this program furniture financing, it can have reach to other categories within our store.

We have worked with our partners at progressive to extend this offering to our higher ticket seasonal area and have experienced some nice response in lawn and garden items, including patio furniture, gazebos, gas grills and even swimming pools.

On the other side of the equation, seasonal comps were down and I’m sure, I’m not the first retail CEO to talk to you about the weather and how it impacted our business. As you might expect, our seasonal business is key to sales and customer traffic. So in that perspective our Q1 results could have been better.

I am confident our issue is whether, because I do believe we offer quality and significant value and Jennifer loves to shop seasonal for her. The good news is warmer weather areas -- in our warmer weather areas our seasonal business was positive.

The balance of the categories, namely electronics and hard home were down the last year as expected. Remember these categories had a majority of the edit-to-amplify clearance activity we began back in Q4 and electronics the majority of the edit was in the higher ticket lower margin business, while in the hard home the edit was centered in tools, paint, auto and what we traditionally called hardlines. Additionally, hard home contains fans and air conditioners, which certainly was not helped by the poor weather we experienced in many of our markets.

So, hopefully these details help you understand where we are from a merchandising perspective. But I would be remiss if I did not mention a significant progress we’ve made in marketing -- in the marketing of our business. The work that the team has done to simplify and provide clarity in our print advertising and our e-mail offerings to our rewards members certainly helped during Q1.

Simply put, I believe we are sending a stronger, easier to understand, value message then we were just six months ago let alone last year. Additionally, some of the early groundwork is being established in the social advertising space and it’s a very exciting beginning for the company.

I’ll now turn the call over to TJ for more insight on the quarter.

Tim Johnson

Thanks, David, and good morning, everyone. Net sales for the -- for continuing operations for the first quarter of fiscal 2014 were $1.281 billion, an increase of 1.1% over the $1.267 billion we reported last year. Comparable store sales for stores open at least 15 months euro increased 0.9%, which was at the high-end of our guidance range of slightly negative to slightly positive.

Income from continuing operations was $28.6 million or $0.50 per diluted share, which was above the high-end of our guidance range of $0.40 to $0.45 per diluted share. This result compares to last year’s adjusted income from continuing operations of $40.3 million or $0.70 per diluted share.

For Q1 the operating profit rate for continuing operations was 3.7% compared to last year’s adjusted rate for continuing operations of 5.2%. The decline in rate was in line with our expectations and driven by a lower gross margin rate and expense deleverage.

Our gross margin rate for the quarter was 38.5%, down 110 basis points to last year. As expected, the rate decline was a result of higher markdowns associated with editing and exiting the business as David just mentioned.

Total expense dollars were $446 million and the expense rate of 34.8% was up 40 basis points to last year. Expense deleverage came from our investment in people, higher depreciation expense and higher bonus expense as the business outperformed our internal plans for the first quarter. Interest expense was slightly less than last year and the first quarter tax rate was 39% compared to last year’s adjusted rate of 38.8%.

During the first quarter we opened eight new stores in the U.S. and closed five living us with 1,496 stores and total selling square footage of 32.8 million. The loss from our discontinued operations for the first quarter of fiscal 2014 was $25.2 million or $0.44 per diluted share, compared to our guidance of a net loss of $37 million to $41 million or $0.64 to $0.71 per diluted share.

The lower than expected loss resulted from incremental deferred tax benefits and favorable settlements on lease terminations associated with store and distribution center operating leases.

Overall, the wind down of our Canadian operations was executed very well and had a lower cost than originally anticipated. Based on what we know today, we believe any additional costs associated with Canada for the balance of the year will be immaterial.

Moving on to the balance sheet, inventory ended the first quarter of fiscal 2014 at $835 million compared to $885 last year. The reduction in inventory was driven by the closure of our Canadian operations and the closure of our wholesale operations and/or lower U.S. store count.

Inventory per store in our U.S. stores increased slightly compared to last year and is actually below our growth projections for Q2 and the balance of year, positioning the business for increasing inventory turnover and cash flow.

We entered the first quarter with $67 million of cash and cash equivalents and $54 million of borrowings under our credit facility. This compared to $72 million of cash and cash equivalent and $137 million of borrowings under our credit facility last year. Our use of cash generated by U.S. operations was focused on repaying debt, funding the closure of our Canadian operations and investing in share repurchase activity.

During the first quarter, we invested $82.5 million to purchase 2.2 million shares or approximately 3.8% of our outstanding shares at an average price of $37.99, leaving us with $42.5 million of authorization remaining at the end of the quarter.

As noted in our press release this morning, subsequent to the end of the first quarter of fiscal 2014, we completed our March 2014 share repurchase program during the month of May. In total, we invested $125 million to repurchase 3.3 million shares at an average price of $38.12.

Now turning to forward guidance, for Q2 we expect income from continuing operations to be in the range of $0.24 to $0.30 per diluted share, compared to adjusted income from continuing operations of $0.37 per diluted share in the second quarter of fiscal 2013.

Q2 guidance calls for comparable store sales in the range of plus 1% to plus 3% based on Q1 results indications from the first 3.5 weeks of May and the initiative rollout of coolers, freezers and furniture financing.

The gross margin rate for second quarter fiscal 2014 is expected to be lower than last year’s second quarter rate and our expense rate is expected to increase based on higher depreciation expense and incremental store payroll costs geared towards certain merchandising resets coming from our edit-to-amplify sell-downs and footage reallocation strategy.

Additionally, our forecast includes a higher bonus component to last -- in last year. You will recall, last year at this time we were lowering our expectations for the balance of the year which necessitated the reversal and reset of our bonus accrual based on expectations at that time.

Our updated outlook for the full year fiscal 2014 calls for income from continuing operations to be in the range of $2.35 to $2.50. This compares to our previous guidance of $2.25 to $2.45 per diluted share.

Our updated outlook is based on actual results for the first quarter, the guidance I just provided on Q2 and the completion of our share repurchase program. More specifically, increasing the guidance range is the direct result of beating Q1 and improving sales trends for the balance of year.

Our updated guidance compares with last year’s adjusted results of $2.45 per diluted share. We now estimate net sales in the range of flat to slightly positive and comparable store sales to increase in the range of plus 1% to plus 2%, which compares to our original guidance of flat to up 2%.

We estimate this financial performance will result in cash flow of approximately $170 million from continuing operations and consolidated cash flow of approximately $145 million after the impact of the wind down of our discontinued Canadian operations. And finally, our estimated diluted share count for fiscal 2014 is $56 million, up from last forecast of $54 million to $55 million.

So, with that, I’ll turn the call back over to David.

David Campisi

Thanks TJ. Before we take your questions this morning, I want to touch on a couple of key observations or thoughts about the future. Over the last 12 months, we have experienced a significant amount of change in the organization and almost every single facet of our operations have some seen some level of impact, we have accomplished more than I could have imagined and made meaningful strides towards improving our company, our culture, our processes and our team.

All executive and senior leadership roles are now filled. The combination of our seasoned executives along with the new hires has created a powerful team, bringing creative thinking to what is always been a terrific business model.

Specifically, I am deeply immersed in the all-important three-legged where we now have great new -- great leadership in merchandising, marketing and the stores. Clearly, consistency in comps has been -- my top priority and I’m confident we now have the team and have instilled the processes and disciplines to drive the business going forward.

I think we are already starting to see early results from the fruits of our labor. I’m very proud of the team at all of that has been accomplished. I want to thank all of our associates in the field, in the distribution centers and in the corporate office for their hard work, dedication and willingness to change.

I was very pleased with the pace of sales and our results in Q1 and I’m encouraged by the start of Q2. We have momentum in many of our key merchandising categories and plans to build off the improving sales trends, particularly in the back half of the year.

However, it is important for investors and our associates to understand, we will not be satisfied with a couple of good quarters or even a good year. This is a multi-year -- particular in the back half of the year -- okay, this is a multi-year growth opportunity, both on the retail side, as well as e-commerce and omni-channel space. We truly are at the beginning of the beginning here at Big Lots.

Next, I want to say a very sincere thank you to our loyal and long-term shareholder base for your support of our team and our Board of Directors. At yesterday’s annual meeting, you awarded us a big vote of confidence by approving all of our Board of Directors and casting a resounding four on our say-on-pay proposal.

We, along with our Board have worked extremely hard to reach out, solicit feedback and reshape our company from a governance and compensation perspective. We appreciate your recognition of these efforts.

And finally, I want to remind you of our upcoming investor conference in June. This will be an opportunity for you to learn more about our SPP, strategic planning process and the underlining initiatives that will help us reach the financial targets that were outlined on the last call.

You’ll also have an opportunity to meet and interact with key members of our management team and walk a store with us. I’m really looking forward to the event and the chance to spend some quality time with many of you.

So, with that, I’ll turn the call back over to Andy.

Andy Regrut

Thanks, David. Anna, we would now like to open the lines for question at this time.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Matthew Boss from J.P. Morgan.

Matthew Boss - J.P. Morgan

Hey. Good morning, guys. Congrats on a good quarter. Can you talk about the monthly cadence of comps, more importantly, the contribution of traffic as the quarter progressed and into May?

Tim Johnson

Yeah, Matt. Matt, this is TJ. The progression of comps candidly went as expected during the quarter. February was a good month for us. That’s a heavy furniture month, as David mentioned, with tax time selling, et cetera.

March was a good month as well. March actually was down a little bit to last year as expected, because of the Easter shift. Easter, because, it falls a little bit later into the month of April, we moved some of our marketing events and promotions to accommodate that traffic and then, April, with the favorable impact of Easter was our best month of the first quarter.

We were encouraged to see most of those good signs in April move on into the month of May. So we were very pleased with the progression of sales throughout the, really the first, almost four months of the New Year.

From following us for awhile that we do not break out traffic and ticket separately, but what I would suggest to you is that, not only the merchandising improvements that the team has made in terms of being more consistent in our offerings along with the two specific initiatives of coolers and freezers and furniture financing.

Clearly, we are doing a whole lot of good work to take down barriers to entry for the customer in the store. So we really believe that we are going at both elements of driving comps in terms of both transaction, as well as driving the average basket.

Matthew Boss - J.P. Morgan

Great. And then I have just one follow-up, you guys reduced store growth a few years back to focus on the core, traffic seems to be improving as you said. There are clearly boxes available out there. How should we think about potential growth of this concept longer term?

Tim Johnson

Yeah. I’ll take that one too, Matt. I think a number of months ago, got more involved with additional responsibilities in real estate that as David provided. And what I would tell you, the first part of your comment, I actually, think the trend out there in real estate are different thing what you mentioned.

Having spent a couple of days at ICSC a couple weeks back, the occupancy rate for our size box in kind of excess inventory is, the occupancy rate is very high, so the availability of space is lower than typically it’s been in the last handful of years and additionally, new center development is just now starting to be talking about -- talked about or now starting to see some signs of movement. So the availability of space for our size box is not as strong as it might have been in prior years.

Now we are, okay, with that, because candidly on the last couple calls we have talked to you about reducing the store count this year, as well as we focused on improving the comp trends in the business expanding the operating profit potential of the business and really be more prescriptive on new store openings and what our requirements are. So we have actually guided to a lower store count this year.

I think that what we spent a lot of time talking about the last couple of days with the Board is really growing -- growing our operating profit potential of the business through comps and a lot of the initiatives that we have talked about. So that’s the near-term focus.

Having said that, if things opened up and someone out of nowhere came to us with larger group of stores. Clearly we have the appetite. We have the liquidity. We have the flexibility as an organization to go after that, but near-term our focus is really on comp store growth and expanding the operating profit potential of the business.

Matthew Boss - J.P. Morgan

Great. Thanks. Good luck

Operator

And our next question comes from Brad Thomas from KeyBanc Capital Markets.

Brad Thomas - KeyBanc Capital Markets

Thank you. Good Morning. And let me have my congratulations as well on the great quarter.

David Campisi

Thank you.

Brad Thomas - KeyBanc Capital Markets

And I want to just ask question on the furniture financing program. David, you spoke to being ahead of plan on its rollout? Could you just give us an update on what progression of revenues is from a timing standpoint after you add progressive to store and then what the contribution margin usually looks like on those incremental sales?

Tim Johnson

Yeah. Brad, this is TJ. I’ll start and ask David to chime in. At a real high level as we add stores to the program which candidly we are adding probably 100 stores or a little bit over 100 stores a weak. So there has been a very deep effort into the organization cross functionally to really get stores up and running as quickly as possible with all areas of the business represented from training to store operations to marketing to all parts of the business.

So it’s been a big, big effort to get this up and running as soon as possible because when we put it up in a given store, almost immediately we see lifts in the business in furniture, incremental lifts in the business in furniture. So it’s been very, very encouraging for us.

We’ll stand by the guidance we gave in the last call, the incremental lifts in furniture in high single to sometimes low double-digit range. And most importantly as we look forward, again we call it furniture financing because that’s how it kind of got started but very encouraged by some of the early results in expanding it into some of our seasonal categories.

The patio furniture is an example over the last couple of weeks has been the second most purchased item as part of the program. That’s very encouraging when you think about the balance of our store, some of the higher ticket areas in the store. And as we look towards holiday, the opportunity in Christmas Trim and other big ticket category, so it’s been very, very well received by Jennifer.

The second part of your question, the profit margins, candidly, are the profit margins of the category. This is not something that we’re discounting with progressive as our provider. It’s been a win-win for both parties. So that when you think about profit margins of the program, think about what are the profit margins of the particular merchandising category. And the last thing I’ll say before I turn it over to David is, again we are not carrying the paper on this, we’re not carrying the credit risk or approval. That is all handled by our provider.

David Campisi

The only thing I’d add to that Brad is that as I said in the last call, we look at this as a significant opportunity to break down barriers that we had in our company. And again you know when you look at this business along with the freezer/cooler program and the SNAP/EBT benefits, it’s clearly an opportunity for us to add incremental volume in top line growth into our company by servicing this customer who has not been able to shop Big Lots.

And what we’re saying is as we said earlier a nice lift in all the stores and again, we believe that there’s a crossover there as well between that SNAP/EBT customer and the customer who is using the furniture financing. And we couldn’t be more excited about the partnership we have with progressive financing.

Brad Thomas - KeyBanc Capital Markets

Okay. Thank you so much.

David Campisi

Thank you.

Operator

And your next question is from Paul Trussell from Deutsche Bank.

Paul Trussell - Deutsche Bank

Hey good morning guys. Good job in the first quarter. Just want to start on gross margins. TJ maybe you can, if you can give a little bit more of a breakdown of the 100 basis point decline in 1Q. How much was attributed directly to the Edit to Amplify strategy in terms of kind of clearing out goods. How much of it was a merchandise mix pressure and is there anything to discuss in terms of just a competitive environment overall. And then just help us understand the cadence of the gross margins as we move throughout the year?

Tim Johnson

Sure Paul. I guess at a real high level as you mentioned the gross margin rate was down about 110 basis points the last year. I would suggest to you upwards of probably 80% to 85% of that, if not a little bit more. It was all about markdowns that we’re taking as part of the Edit to Amplify and some of the reset activity that was planned to accomplish some of our initiatives specifically coolers and freezers and making room for that in the store.

So again large part of the gross margin rate declined. I would estimate around about 85% is attributed to that activity. That is what we’ve talked about for the last six months. Nothing has changed in that regard. Any kind of mix pressure that we were feeling in the quarter because again Food comped up double digits and Consumables were very strong as the smaller part of the gross margin rate challenge in first quarter.

Now we expect Food and Consumables to out-comp the store the rest of the year. So that pressure on it is going to be there. That is in our guidance. The only point I would kind of remind you of is we’re hopeful, we get a little bit of relief from that pressure going forward is two-fold. First off, seasonal, had a tough quarter, we think it’s all about weather. We like the assortment we have in the store but clearly when it comes down, that’s going to put a little bit of pressure on mix.

And then secondarily, very encouraging in the first quarter is the comp growth we experienced in some of our home categories which as you know from following us for a while is a higher margin area. We would expect to see some of that growth continue if not get a little bit better as we move through the year.

So I guess the point is, there is a lot of moving parts to this. We try to accommodate that in our guidance. We do expect to see some pressures still in the second quarter. Again we communicated that six months ago that this is a spring initiative, the spring challenge for us to move through some of the Edit to Amplify and categories we wanted to downsize, nothing has changed. We do expect the margin rate to be up in fall and again the majority of that improvement is as we start to lapse some of the Edit to Amplify activity from last year.

So nothing has changed on our gross margin rate forecast in terms of the cadence or the elements of it. This is very consistent with what we talked about, really starting back in December.

Paul Trussell - Deutsche Bank

That’s helpful color. Thank you TJ. And just want to go back and touch on use of capital. Just -- TJ, if you can just remind us what the CapEx plan is for this year and how we should think about that next year given your plans on e-commerce. And with the business performing well and off to a better-than-expected start, you are obviously generating more free cash flow.

Let me know if there are plans to add more projects therefore to your capital plan in terms of utilizing that free cash flow or will the primary usage continue to be share repurchases?

Tim Johnson

There are couple ways to think about that and I’d ask David to chime in here too. I think first off, we have not changed our CapEx plan, Paul. Based on first quarter results, our guidance was $115 million to $120 million for CapEx. We’re still in that range in terms of our expectation.

I’d remind you that does include some level of CapEx. I think we estimated around about $10 million to $15 million for e-commerce which is scheduled to go online until some time in 2015. Having said that, uses of capital and uses of cash clearly we’ve demonstrated in the first quarter that we felt that the best near term use of cash that we were expected to generate in the first quarter and for the year was supporting shareholders and supporting the stock. And we concluded our repurchase program just recently in May.

Looking forward -- I won’t answer the looking forward question because what I would like to do is really put that in the right context for you when we get to the Investor Day next month. Shareholder return and capital structure and uses of cash is absolutely a key element of the SPP. And we want to put really the SPP in front of investors and the analysts in complete context. So we’ll absolutely talk more about future uses of cash and future CapEx expectations. But we’re going to do it in a right context of the three-year plan.

The last thing I would mention in terms of adding additional projects, I think it’s important that everybody understands we have a number of associates in the building and out in the field that listen to these calls on a regular basis. And we have hundreds of people working extremely hard on this strategic plan to deliver the next three years. Everybody has a full plate of activity and things to do.

So we’ve identified a number of great initiatives to go after. I think it’s important to note we’re not adding initiatives to our plate after one quarter. We feel like we’ve got a pretty full plate of opportunity as it is.

David Campisi

Yeah. I would just add to that that’s exactly what is going on in the company. As I said earlier, there has been a significant amount of changes not only with the people in the organization but the strategic plan as we will outline in detail for you guys on June 26. Obviously the three pillars are Jennifer, our associates and then what TJ just talked about the operating efficiency and the use of capital is critical. But underlying all of those overarching objectives you’ll see are very large amount of initiatives in play as we speak.

And I think you’ll be excited to see this and understand it in more clarity when you’re here in June. And again I caution our people all the time that let’s be very careful about putting anything additional on our plate on top of what’s already there. Because we’re in the middle of what will be called part three of the strategy and that’s the heavy lifting of execution, Paul, and it’s big.

And so at this moment in time, I would say we’re in great shape. We clearly have a vision of where we’re going. And again, it’s TJ outlined from the standpoint of use of cash and our focus on shareholder return. I think as he and I navigate over the next couple of three weeks, we’ll have a clearer, stronger and better story to tell in June.

Paul Trussell - Deutsche Bank

Thanks for the color.

Operator

And we’ll take our next question from Meredith Adler from Barclays.

Meredith Adler - Barclays

Thanks. Congratulation guys. So I’d like to -- I’d like to propend on Jennifer. And I want to know what I would see when I go into the store. How do you see that all of the Hardlines, tools and all that stuff is gone and something else is in that spot or is that still in process or is that visible in some stores and not others?

David Campisi

Hi Meredith. It’s David. Yeah, the -- as we said before, it’s an evolving process. And yes, we took many markdowns on tool, paint, automotive and a lot of other exit categories at the end of Q4 and Q1 as well. Store-by-store you are going to see some of it gone, some stores will still have some residual inventory because it doesn’t go away overnight. But as we evolve and what Jennifer is going to start to see when she comes in the store is a more compelling food assortment as we give them additional lineal allocation as we unwind these businesses.

And then as you navigate through the store, we’re hoping that you start to see furniture which is such a critical business and a great business for us merchandised with a little bit more finesse. Now I have to caution you that this is evolving. This is something that that’s part of the strategy is educating our stores on how to merchandise furniture in a way that looks more like your home. And that’s going to take time and it’s a big one.

And then again you are going to see a much more compelling assortment in soft home than you’ve never seen before. And I’m excited I saw the back-to-school presentation in that area and it was fantastic. And I couldn’t tell you that last year when I saw it, so significant improvement there.

But as you look through the store, again one of our strength is not only furniture but it’s that seasonal business. And you’re going to continue to see the flow of that product as we exit the patio furniture, lawn and garden and we transition into the categories for holiday, even pre-holiday, Thanksgiving, Halloween and then Christmas, a powerful presentation and we do things candidly that a lot of our competitors don’t do. And one of those is in that season where we actually display the product in a big way and Jennifer loves that and we actually outperform the industry because of that.

You will see a downsized electronics department and the most exciting thing about that for Jennifer is the rollout of new accessories layout that’s going to come off this fixture, we used to call the barge. And in line into the, Gondola Run is fantastic and the team both in marketing and merchandising, if I remember the numbers, part of Edit to Amplify is not only exiting and that’s really important that all of you understand this is, is now that we’ve decided what those go-forward businesses are, we are going to edit and amplify those go-forward businesses and reduce our SKU count, so that you see a powerful, more focused presentations.

So on electronics, you are going to see this fall, as we do the resets, a beautiful execution of accessories and very compelling, and very easy for Jennifer to shop. In fact, work with the test stores have been telling us that in the past the way we used to merchandise electronic accessories, cell phone, iPhone chart covers and so on in that category. The customers would just throw the stuff back on the shelf are on the barge today. They are actually putting it back on the peg that they picked it up from. So there is a lot of good stuff to come and you will start to see this as you move into third quarter, as we continue to exit the balance of those categories. For example, you will start to see the unwind of books in this quarter. And then again, a reallocation of space in those go-forward businesses.

Tim Johnson

Meredith, if I could, kind of just summarize, there is two or three things. There is a lot of change going on in the stores, as David mentioned two or three things in specific but directly tieback to Edit to Amplify. The electronics reset, a reset, we are in expansion of food and consumables which will happen late in second quarter and that’s really picking up footage from the categories that have been absolute.

And then the third thing today to David’s point, the set for back-to-school, although we do back-to-school every year, the set for back-to-school that the team has put together this year, you should experience a lot more pop in terms of color and fashion in particular. Those two or three key things, as you walk the store in second quarter is what I would ask you to try to look for.

Meredith Adler - Barclays

Okay. Great. And then that’s really all very helpful. Another question I have is about the impact of coolers and freezers. I remember, on one of the conference calls before you really hold it out anywhere, maybe just testing it, was it you wanted to see the customer buy more than just freezer and cooler or consumables food product that you wanted to try to get in the shop in the rest of the store. I don’t know if you’ve updated us on the stores that have freezers and cooler, whether you are actually getting that result and if not, are you comfortable with the fact that they are going to shop now with that category?

Tim Johnson

Meredith, this is TJ. We are comfortable that coolers and freezers are driving the result that we expected and that we needed to make this work from a financial standpoint. We’ve consistently seen increases in comps and transactions. On the majority of purchases, it is focused in food and consumables. However, what we are encouraged by is two things. First off, we are seeing a fair amount of customers who are purchasing with SNAP and EBT benefits actually joining our rewards program, which is a good sign for us. And we are also seeing really nice crossover between coolers and freezers in furniture financing, which again is also a good sign for us because as I mentioned earlier that’s -- furniture is good margin product for us, right in line with the company average.

So we do believe that in coolers and freezers are driving the expected result and candidly that’s what, as David mentioned, not a complete rollout this year. But also we think there is an opportunities to really grow that and market it going forward that we are not able to capitalize on today, given the lower store count we have with the initiative up and running.

David Campisi

Yeah. And I would just add to that, Meredith that we clearly early on recognized we weren’t given the food and consumables business enough exposure from a marketing point of view and traffic driving high trip frequency business. And when you think about it, we were discussing this with the Board yesterday about those key trip frequency drivers and when you look at it and you say a refrigerated trip is the biggest one of all, about 67 trips a year is how that breaks out. So, if you think about Big Lots, not being in that category and again, TJ mentioned the marketing piece. We haven’t even begun to leverage the opportunity to tell the story about the refrigerated program, let alone the opportunity for us to talk to the customer about SNAP and EBT.

So, I look at it clearly as a significant opportunity for us to drive significant frequency of footsteps into the box and hopefully convert Jennifer and that consumer into other areas of the store. And again, we see a little bit of that. As I mentioned earlier with the furniture financing, we are progressive. That program is the same customer. And so we really feel like we have something big here that’s going to continue to grow and again, we are rolling out this year. We haven’t even really been able to tell the consumers. So next year should even be stronger in freezer, cooler.

Meredith Adler - Barclays

Super. Thank you very much.

David Campisi

Thank you.

Operator

And our next question is from David Mann from Johnson Rice.

David Mann - Johnson Rice

Hi. Yes. Thank you. Couple of questions and by the way good quarter. In terms of the seasonal performance, can you talk a little more about that performance in the warmer weather markets and how seasonal tracked in May thus far?

David Campisi

Okay. I will ask the first part of that for you, David. In the warmer markets certainly, whether it was California or parts of the Southwest or even Florida, we were seeing very nice sell-throughs on a weekly basis and positive comps. The biggest piece of that lawn and garden business obviously is the patio furniture area and we were seeing a nice performance there along with the cushion business and other attachments. The gazebos were strong and so on. So we were encouraged by that, knowing that once we could get a break in the weather, especially in the Northeast, the Central and Northeast part of the country where we were really struggling.

Once that broke out in May, I’m very pleased with the performance in May in the rest of the country. Again, as I said earlier, I spent a lot of time in Asia with this team in this particular area. We have a strong buyer here and the relationships that he has got over there with the factories and I can tell you some of these factories that make really premium product is where ours is made. It’s not a product issue. It’s not a quality issue. It certainly isn’t a fashion issue. So it clearly was driven by weather and we saw that activity out there, as we shop the competitors and people breaking price early in the first quarter. So, again, pleased with the performance in May.

David Mann - Johnson Rice

And then TJ in terms of SG&A, any change in the annual guidance that you gave last quarter?

Tim Johnson

No. The SG&A piece of the business actually outperformed a little bit in the first quarter. We are constantly reforecasting our business. So it’s not that the SG&A base is not without change but there is nothing out there that we believe is concerning at this point. Actually everything is moving very nicely. And one of the key elements that David mentioned earlier that we will talk about next month is really where we see the opportunities to continue to get more efficient, whether it be in SG&A or in certain margin initiatives. So the organization is very focused on keeping the comp leverage point as low as possible.

David Mann - Johnson Rice

And then one last question on furniture finance. I’m curios, while you don’t own or take the paper, I’m just curious if you have any sense on how the initial performance of that paper has been for progressive.

David Campisi

We could share some directional comments again. I don’t want to get into specifics. It is really their business to talk about it at that point. But at a real high level, we are very pleased with the approval rate and we are very pleased that the fact it’s taken down barriers to entry for our customer. We believe that this is a customer that has a difficult time getting credit elsewhere but is making payments on a regular basis.

And really the concerns early only on that were expressed on some of the conference calls about the charges and the cost of the consumer. I think what we are experiencing is they are actually using this as something that they can pay off in a very short period of time relative to some of the other programs that are out there. So everything is moving forward nicely. From our perspective, they have been a great partner to work with and we’ve been in frequent communication with them at the highest levels and clearly, the customers is the big winner here.

David Mann - Johnson Rice

Thank you.

Operator

And we will take our next question from Peter Keith with Piper Jaffray.

Peter Keith - Piper Jaffray

Hi. Thanks. Good morning. The stores are looking great, guys, so nice work.

David Campisi

Thank you.

Peter Keith - Piper Jaffray

Real quick question on comp, just a two-part question. I will ask one first. Do you have any way of quantifying what the negative drag from weather was in the first quarter?

David Campisi

That’s tough. The quick answer, Peter is yes. We do look at it internally. We will look at it internally every week. It’s not on a shorter-term basis daily. They are really trying to understand what’s working and what’s not. I would tell you that we did see some level of disparity by region as David mentioned. So we know that impact is out there. Now having said that, we have weather in certain markets every year, so it’s difficult to really get a fine point estimate. But we know in certain categories and in certain markets, we will have some opportunity on the table that we hope comes back to us here in second quarter.

Peter Keith - Piper Jaffray

Okay. Got it. That’s good enough. On a related note then, I’m just looking at your comp guide for the remainder of the year, you are implying at the midpoint for Q2 about a 2% comp and then that would -- the full year guide originally would also seem to imply sort of 2%, for the rest of way for the year. I think at the beginning of the year, you thought that your first half would be lower than second half. So the revised guidance doesn’t really reflect that. And I’m curios is that sort of some conservatism on the back half outlook, or has anything change from a big picture perspective?

David Campisi

Candidly, Peter, nothings changed from a big picture perspective. I would tell you our comp guidance for second quarter is absolutely in line with our internal plans. So nothing has changed in that regard. If there’s anything that’s maybe a little different than what you might have modeled or expected, we did have some incremental advertising here in second quarter which makes it, maybe look a little more favorable than you were thinking or then what you were expecting based on kind of cadence. But other than that things are moving ahead as expected. I guess the only thing that I would add to that commentary in terms of the back half of the year is when you think about fourth quarter as an example, we will have all of our initiatives up and running clearly and you do get the benefit of an extra day. But everybody has that little bit, but no -- there’s no real changes really to our forecasting internally. The only thing that again might be different than what you were expecting is there is a little bit of incremental marketing activities in second quarter as compared to last year.

Peter Keith - Piper Jaffray

Okay. That’s helpful. And I look forward to see you guys on June 26th.

Tim Johnson

Thanks Peter.

Operator

And we’ll take our next question from Jeff Stein from Northcoast Research.

Jeff Stein - Northcoast Research

Good morning, guys. Few questions for you real quickly. First of all, how much of the inventory that you’re not going to carry on a go-forward basis was liquidated in Q1 and how much do you have left to go?

Tim Johnson

Jeff, we didn’t give specific numbers other than to say that the product that was being liquidated was less than 5% of the total store, so this is a smaller portion of the store. I would tell you the majority of the categories have been marked that a stock or 50% to 75% off here, as we began in the month of May. So the majority of the activity is complete. However, there is some product that we will still need to deal with during the second quarter.

The good news is that as we work through second quarter, we’re able to do things like reset the electronics area and expand a little bit, some footage allocated to food and consumables, which clearly is on a good trend for us. All that activity will happen in second quarter. So that as we move forward into the fall, and we can move into the next form of Edit to Amplify, which is really looking at SKU count and things that David mentioned. So everything is moving as expected.

Jeff Stein - Northcoast Research

Okay. And with respect, TJ, to your circular program, can you talk a little bit about how they match up year-on-year? I noticed, you had quite of few over the past month and I just want to understand, was it kind of apples-to-apples and how are we looking on a go-forward basis for the rest of the spring?

Tim Johnson

First quarter was apples-to-apples, Jeff. We do have some incremental activity in second quarter, which is really about capturing first of the month and one of the month that was missing in prior years. On the flip side, we’ve also tested and looked at our July 4th promotional period and are going to do things a little bit differently there. Again, that was in our plan, that’s been in our expectations all along. I do want to just kind of clarify. I’ll ask David to provide more color.

First quarter, I think what you probably recognized and it’s a nice shout-out to the team that’s listening on the call, is that it might feel like there are more ads out there but there really were not. What you’re feeling is a cleaner message and a more frequent message on newness and new deliveries to the store and exciting deals to the store that we are sending out to our Rewards Club base.

David Campisi

Yeah. And I would add to that Jeff that what TJ is referring to is the team has done a great job both on the merchant side and the marketing side of developing a much stronger cadence of storytelling and compelling offerings versus just a bunch of stuff on a page. And that really, really started to come together in the middle of first quarter and will continue in the second quarter.

The other thing that you probably have seen is significant change on the messaging on the front cover. A year ago, over this past Memorial Day weekend as an example and that was really the first ad that I saw, when I got to the company and it was pretty stunning because I have always believed in what I refer to as weatherproofing your advertising and you can’t put all eggs in one basket. Last year’s ad was all pools and patio and the weather was not good and we got what we ask for from Jennifer.

This year, if you look at that ad and many of the ads prior to that, what you’re seeing now on the cover, whether it’s a fantastic furniture story or a seasonal story or whatever category that we are putting together on the cover, we always have food and consumables on that cover now because those are those lead used by most categories that I talk about all the time, trick drivers. And that has really, really helped us and I believe helped us in the quarter and we’ll continue to help us as we navigate through the balance of the year.

Jeff Stein - Northcoast Research

Great. And one final one real quickly, any update on the rewards program, how many members? And do you believe the new program is providing a bigger lift? Thank you.

Tim Johnson

You know what I do not have the number of members handy, Jeff. But what I do believe is happening is really two-fold. I think that to David’s point, there is a much cleaner message and easier to understand and we’re focused on newness, not trying to move product to at a discount so to speak. But I also think that the approach that we’ve taken towards really trying to encourage that infrequent customer to shop the store more often has also seen some level of benefit.

So, again an infrequent customer in our definition is someone who may shop the store once or twice of the year at certain periods in time, maybe it’s a seasonal holiday purchase or something for Easter or Father’s Day or something like that. That customer already knows us and clearly likes us but how do we get them in more frequently and start to move them into that bucket of core customers. That has been a focus of the team over the last few months and we are starting to see some positive migration that way.

Operator

And we’ll take our next question from Anthony Chukumba from BB&T Capital Markets.

Anthony Chukumba - BB&T Capital Markets

Good morning. And let me add my congratulations as well. So you mentioned earlier in the prepared remarks that all executive and senior leadership roles are now filled. And I just want to get a little bit of color on that because if I recall correctly, you’re still looking for an SVP of stores and maybe one Divisional Merchandise Manager. So, I just wanted to see if those positions have been filled and if there are any other positions that were filled, I guess, since you last updated us on that? Thank you.

David Campisi

Yeah. Anthony, it’s David, great question and yes, they all have been filled and excited to share with you that we filled that divisional position in the home of the very strong leader and a guy with a lot of experience with soft home. And we’re also pleased that we finalized the last two hires in both the Senior VP of store operations. Nick Padovano is onboard, I think he’s been here now three weeks and a fantastic addition.

And the last hire under Lisa’s leadership team is Richard Flaks. And Richard is now here on board as the SVP of Planning and Allocation and Replenishment, a very knowledgeable guy that’s going to add a lot to the business. So the team is in place, including me, there is 14 others.

And as I’ve said consistently, we are excited with the seasoned executive team with Tim Johnson and Lisa Bachmann and Mike Schlonsky at my side in the last 12 months. And then along with some other senior leadership in distribution and transportation, Carlos and Stewart in the CIO, that’s the team of five that has been on my side throughout this navigation.

And now that we’ve added the balance of nine, it’s a very powerful thing that’s happening in our company. And underneath that as you mentioned, the divisionals and new buyers and all the folks in the company, in the building here. As I said earlier in those prepared remarks, the big thing that’s very encouraging is how everyone has shown the willingness and the desire to change has been fantastic. And again, we’re in a transformation that it’s fantastic. So we’re complete and we’re excited about it.

Anthony Chukumba - BB&T Capital Markets

Okay. That’s really helpful. Keep up the good work and I’ll see you in Columbus in late June.

Tim Johnson

Great. Thank you.

Operator

And our last question comes from Dan Wewer from Raymond James.

Dan Wewer - Raymond James

Thanks. David, want to follow up on the cooler/freezer strategy and if you consider testing stores with perhaps 20 cooler as opposed to, I think the current said is what eight or nine. And that would perhaps make the company a bit more competitive with where the value retailers are going with their cooler rollouts?

David Campisi

Yeah. Dan, its David. I would tell you that we’re very pleased with the strategy of using the 10 coolers and freezers in our stores. And we don’t see expanding that at all. I mean that model as you know is heavily tested early on and we have some tweaks. The big thing today is not just throwing 10 coolers in the stores and hoping that it’s going to work as I say often hope is not a strategy.

Well, we have in place is some very powerful folks in that food division that understand the business and what type of an assortment needs to go into that freezer/cooler. And I would tell you there’s a lot of work being done by that team to ensure that we have the proper assortment not only in the current stores but on a national basis. And there is high hopes there to regionalize it. It’s really about the content and the assortment and just being competitive in pricing is also important. But we don’t see changing that whatsoever.

Dan Wewer - Raymond James

And David, just one other follow-up question, when you look at the achievement that you’ve accomplished that you highlighted during the call. And then you look at the result from the different types of real estate at Big Lots. Before you joined the company, they were acquiring these former leases from Linens n Things and Circuit City. Have you seen a bigger bounce back in those locations that were in the old days they used to call A locations or have those A locations not outperformed the B locations?

David Campisi

Well, I’ll take the first part of that then I’ll turn it over to TJ, since he now runs the real estate division and just got back in the big conference in Las Vegas and have a clear understanding of where we’re headed there. But first for clarity purposes, I would just tell you Dan that, it’s when you say all the things that I’ve accomplished, it’s really not what I’ve accomplished, it’s what we have accomplished.

Again, I can’t make it more clear that all of the work and the accomplishments in the company at all levels of the organization could not have happened without our people stepping up and being part of it. And so I want to make that clear that it’s not about me, it’s about them.

Secondly, what I would tell you is the real estate piece and TJ may understand what you’re referring to from the A locations. We have a mixed bag of real estate out there, obviously when you have 1500 stores. And I would tell you that we have put in place a completely different strategy on how we look at a piece of real estate before we lease it, including the width of the building and things like it must have a loading dock and so on and so forth. And so we’re dealing with some locations out there that candidly we know over time have to go away.

And I would tell you TJ will talk in a second here about our strategy on A locations. We have, what I would use a word is, we have more courage today to look at that and say what -- where we’re headed as a company in doing some of the things we’re doing with the new stores and how we’re merchandising furniture in the front and seasonal and so on. Very encouraging results and we’re more encouraged about being able to go in the more A on A locations. But I think, TJ can add a little bit more color there too.

Tim Johnson

Yeah. Dan, I don’t know that I could tell you that in the first quarter what we used to call A stores outperformed with the balance in chain. Again, I think, a lot of that has to depend on who got initiatives and who didn’t in some of the weather comments that we made before. But to David’s point, I would suggest to you, we’re being much more selective in what’s going to makeup at number of new stores.

Well, having said that we’re not afraid to step out in certain locations in markets where we have confidence that the strategy can work. A real good example of that is a couple of stores that we’re going to be actually opening here in the fall season in and around the New Jersey area. I know around New York City, not in the city, but in closer proximity than source we have today.

Those are high rent areas, high traffic areas but we absolutely believe, we can perform in those locations. So for us in near term, I can’t tell you that As versus Bs versus Cs are any different whether there’s necessarily any income demographic difference in terms of performance. It’s really about some of the new initiatives and new content. So at this point, we’re kind of in that -- all boats are kind of rising with the tide mode, and getting incrementally a little bit better every quarter.

Dan Wewer - Raymond James

Okay, great. Thank you.

Tim Johnson

Okay. Thank you, everyone. Anna, will you please close the call?

Operator

Yes. Thank you. Ladies and gentlemen, a replay of this call will be available to you within the hour and will end at 11:59 p.m. on Friday, June 13, 2014. You can access the replay by dialing toll-free, USA and Canada, 888-203-1112 and entering replay pass code 1786698; international, 719-457-0820 and entering replay pass code 1786698.

Ladies and gentlemen, this concludes today’s presentation. Thank you for your participation. You may now disconnect.

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